[New York Diary] Walking on Thin Ice... IMF Lowers Korea's Growth Rate Four Times in a Row

Reporting Everyday Stories from American Life in New York

"It is like walking on thin ice."

Before attending the Group of Twenty (G20) Finance Ministers and Central Bank Governors Meeting, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho met with correspondents in New York and made this remark regarding the management of the Korean economy. On the following day, April 11 (local time), the International Monetary Fund (IMF) once again lowered South Korea's growth forecast for this year to 1.5%.

Looking at the numbers alone, this is not significantly different from the 1.6% previously presented by the Ministry of Economy and Finance or the 1.5% announced by the National Assembly Budget Office. The diagnosis that the economy is facing a downturn due to export sluggishness centered on semiconductors, domestic demand recession, and real estate market stagnation is also the same.

What is more concerning is not the 'numbers' but the IMF's behavior. Among so-called advanced countries, only South Korea's economic outlook has been continuously downgraded. This is the fourth time. No such adjustment has been made across the entire G20. According to the IMF, South Korea's 2023 growth forecast has been revised downward four consecutive times since April last year (2.9%): July last year (2.1) → October last year (2.0) → January this year (1.7) → April this year (1.5).

In January this year, when the IMF raised the global growth forecast, it lowered the outlook only for South Korea and the United Kingdom among advanced countries. At that time, the UK was still suffering from the aftermath of the chaos caused by the large-scale tax cuts and fiscal expansion policies of the former Truss administration. This time, along with South Korea, the IMF lowered the growth forecasts for Japan and Germany. All of these are advanced countries where exports account for a relatively high proportion of the national economy.

[Image source=Reuters Yonhap News]

Krishna Srinivasan, IMF Asia and Pacific Department Director, said at a press conference held both online and offline in Washington DC on April 13 that the reason for the four consecutive downward revisions of South Korea's economic outlook was "naturally the deteriorated global semiconductor cycle." He diagnosed that the slowdown in the semiconductor industry is affecting both South Korea's exports and investment. He also mentioned the post-COVID-19 consumption slowdown, the continued effects of monetary tightening policies, and the downward trend in the real estate market, expressing concern that "all of these are affecting consumption, weakening domestic demand compared to the past."

The IMF's consecutive downward decisions suggest that South Korea's economic situation is so severe that it is difficult to find a turning point for growth recovery compared to other countries. Both exports and domestic demand, which are key to judging whether the economy can achieve a soft landing, are retreating. Exports in March fell more than 13% year-on-year, continuing a decline for six consecutive months. Although recent export sluggishness is a common phenomenon among manufacturing-based export countries, the fact that South Korea's export decline is particularly large is worrisome. It indicates that so-called 'export competitiveness' itself is deteriorating.

Another new concern for the Korean economy is that China, which used to provide opportunities for economic rebound, is no longer the same as before. Deputy Prime Minister Choo evaluated, "The era of making large surpluses through China as in the past seems to be over," and added, "It is clear that China no longer offers us a quick opportunity for rebound as before." At best, there is some hope that the reopening effect of China will fully materialize within this year and have a positive impact on neighboring trading countries.

Another problem lies in the domestic demand sector. The greatest concern is consumption, which accounts for about half of the gross domestic product (GDP). High inflation and high interest rates inevitably lead to consumption contraction, and the fiscal capacity to counter this is lacking. Moreover, the aftermath of the banking crisis triggered by the US Silicon Valley Bank (SVB) poses a key question about what impact it will have on the Korean economy going forward. If financial regulations worldwide are tightened and lending standards raised, liquidity for households and businesses will slow, foreign currency financing conditions for Korean companies will worsen, and investment will inevitably decrease.

South Korea, with its high external dependence, is also vulnerable to external shocks. Deputy Prime Minister Choo, who must manage economic policy on this thin ice where it is uncertain what might come from where, delivered a simple and clear message after finishing a briefing in New York. ‘Don’t find fault, find a remedy.’ It is time for bold policies to overcome the crisis.